The Ultimate Guide to Closing Costs
Just like when you purchase a car, the listed price of the home does not include the additional fees. Essentially, the "sticker price" is not the out-the-door price. For home purchases, these additional fees are lumped together and called "closing costs."
Here are the fees you can expect to pay in the final stretch of your home purchase.
Closing Costs Explained
Closing costs cover the expenses that finalize your home loan, whether its a purchase or a refinance. Most of the closing costs responsibility falls on the buyer. However, the seller will pay a few as well, such as their real estate agent's commission.
If negotiated, the seller may also cover all or part of the buyers closing costs.
How much will you pay in closing costs?
Average closing costs run between about 2% and 5% of the loan amount. So on a $300,000 home purchase, you can expect to pay between $6,000 to $15,000.
The most cost-effective way to handle closing costs is to pay it upfront, out-of-pocket though some choose to finance their closing costs by rolling them into the loan. However, that's not always an option, plus it'll end up costing more since you'll also pay interest.
List of Buyers Closing Costs
Appraisal fee: A home appraisal checks that the property is worth the amount you are borrowing. The typical cost is about $300 and $400.
Home inspection: Home inspections are usually required, especially if you're getting a government-backed loan such as an FHA. A home inspection is also a smart move for you, the buyer, as it will reveal any potential problems before the deal is final.
If the inspection finds problems, you can use it to negotiate a lower price. Depending on how bad the issues are, you may be able to back out of the contract. Home inspection fees are about $300 to $400.
Application fee: This fee covers the cost of processing the loan, such as credit checks and administrative expenses. This fee varies depending on the amount of work it took to put process your loan.
Our office uses digital mortgage processing, which helps to speed up the timeline as well as lower our overall expenses. We pass these savings to our clients!
Assumption fee: This only applies if the seller has an assumable mortgage in which you are taking over the remaining balance. The amount depends on what that balance is.
Attorney fees: Some states require an attorney to be present at the closing. The amount depends on how much the attorney charges per hour and how many hours they are present at the signing.
Prepaid interest: In some cases, you'll be required to pay the interest that accrued between the settlement date and the first mortgage due date. The fee depends on the amount borrowed and your interest rate.
Loan origination fee: Also known as an underwriting fee, administrative fee, or processing fee, this covers the evaluation and preparation of your mortgage loan. You can expect to pay about 0.5% of the amount you're borrowing.
Discount points: Discount points reduce your interest rate and are especially attractive if you plan on staying in your home for several years. The cost of one point equals 1% of the loan. So for a loan of $350,000, a 1-point payment would be $3,500. This fee only applies if you purchase points.
Mortgage broker fee: Brokers usually charge a commission as a percentage of your loan amount. The amount varies.
Mortgage insurance fees
Mortgage insurance application fee: If your down payment is less than 20%, you'll have to get private mortgage insurance (PMI). This fee varies by lender.
Upfront mortgage insurance: Some situations require borrowers to pay the first year's mortgage insurance premium upfront. Expect it to be about 0.55% to 2.25% of the purchase price of the home.
FHA, VA, and USDA fees: If your loan is government-backed, you'll have to pay the following fees:
- Mortgage insurance premiums for an FHA loan
- Guarantee fees if it's a loan funded by the Department of Veterans Affairs or the U.S. Department of Agriculture.
Property taxes, annual fees, and insurance
Property taxes: Buyers usually pay two months' worth of property taxes at closing.
Annual assessments: If your homeowners' association requires a yearly fee, you might have to pay it in one lump sum upfront.
Homeowners insurance premium: Homeowner's insurance covers your property in case of damage. Some homeowner's associations include it in the monthly fee, so it's worth asking before you purchase it separately.
The amount depends on where you live and the home's value.
Title search fee: A title search makes sure that the person selling the house is the true owner and that there are no claims or liens against the property. It's relatively labor-intensive, especially if the records aren't computerized.
It's about $200 but varies among title companies. The search fee may be included in the cost of title insurance.
Lender's title insurance: This protects the lender in case there's a mistake in the title search, and someone makes a claim on the property. Coverage lasts until the mortgage is paid off.
Owner's title insurance: Similar to the above, except this insurance helps to protect you, the buyer. It lasts as long as you or your heirs own the home and costs about 0.5% to 1% of the property purchase price.
Insider tip: A discount is sometimes available if you purchase the lender and owner policies at the same time.
It may seem like it's a lot to handle, but with preparation, all of these fees are quickly taken care of. Plus, some may even get covered by the seller! Contact us and let us show you how affordable homeownership can be.